SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 AND 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 1997 Commission File No. 0-16867
UNITED TRUST, INC.
(Exact Name of Registrant as specified in its Charter)
5250 South Sixth Street
P.O. Box 5147 Springfield, IL 62705
Address of principal executive offices, including zip code
Illinois 37-1172848
(State or other jurisdiction (IRS Employer
Incorporation or organization) Identification No.)
Registrant's telephone number, including area code: (217) 241-6300
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the Registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
YES X NO
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date.
Shares outstanding at October 31, 1997:
1,634,779
Common stock, no par value per share
UNITED TRUST, INC.
(The "Company")
TABLE OF CONTENTS
Part 1: Financial Information 3
Consolidated Balance Sheets as of September 30,
1997 and December 31, 1996 3
Consolidated Statements of Operations for the
nine months and three months ended September 30,
1997 and 1996 4
Consolidated Statements of Cash Flows for the
nine months ended September 30, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Part II - Other Information 16
Item 5. Other information 16
Item 6. Exhibits 16
Signatures 17
2
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
UNITED TRUST, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, December 31,
ASSETS 1997 1996
Investments:
Fixed maturities at amortized cost
(market $188,585,275 and $181,815,225) $185,691,622 $ 179,926,785
Investments held for sale:
Fixed maturities, at market
(cost $1,836,015 and $1,984,661) 1,834,388 1,961,166
Equity securities, at market
(cost $2,741,632 and $2,086,159) 2,783,623 1,794,405
Mortgage loans on real estate at amortized cost 10,010,243 11,022,792
Investment real estate, at cost,
net of accumulated depreciation 10,635,617 10,543,490
Real estate acquired in satisfaction of debt,
at cost, net of accumulated depreciation 3,856,946 3,846,946
Policy loans 14,211,585 14,438,120
Short term investments 425,458 430,983
229,449,482 223,964,687
Cash and cash equivalents 13,089,285 17,326,235
Investment in affiliates 4,996,199 4,826,584
Accrued investment income 4,094,360 3,461,799
Reinsurance receivables:
Future policy benefits 38,414,086 38,745,013
Policy claims and other benefits 3,200,091 3,856,124
Other accounts and notes receivable 1,032,444 894,321
Cost of insurance acquired 42,254,048 43,917,280
Deferred policy acquisition costs 10,897,379 11,325,356
Costs in excess of net assets purchased,
net of accumulated amortization 2,782,883 5,496,808
Other assets 1,443,155 1,659,455
TOTAL ASSETS $351,653,412 $ 355,473,662
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities and accruals:
Future policy benefits $249,367,949 $ 248,879,317
Policy claims and benefits payable 2,236,479 3,193,806
Other policyholder funds 2,552,358 2,784,967
Dividend and endowment accumulation 14,687,638 13,913,676
Income taxes payable:
Current 1,101 70,663
Deferred 13,473,857 13,193,431
Notes payable 22,566,713 19,573,953
Indebtedness to affiliates, net 17 31,837
Other liabilities 4,392,866 5,975,483
TOTAL LIABILITIES 309,278,978 307,617,133
Minority interests in consolidated subsidiaries 26,666,108 29,842,672
Shareholders' equity:
Common stock - no par value, stated value $.02
per share Authorized 3,500,000 shares - 1,634,779
and 1,870,093 shares issued after deducting
treasury shares of 277,460 and 42,384 32,695 37,402
Additional paid-in capital 16,488,376 18,638,591
Unrealized appreciation (depreciation) of
investments held for sale 138,936 (86,058)
Accumulated deficit (951,681) (576,078)
TOTAL SHAREHOLDERS' EQUITY 15,708,326 18,013,857
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $351,653,412 $ 355,473,662
3
UNITED TRUST, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
Revenues:
Premium income $ 7,217,037 $ 7,836,950 $ 23,360,291 $ 25,514,821
Reinsurance premium (1,384,230) (1,303,035) (3,511,544) (3,666,681)
Other considerations 862,654 866,137 2,677,994 2,628,275
Other considerations
paid to reinsurers (56,067) (51,853) (152,179) (132,530)
Net investment income 3,686,861 4,038,831 11,357,217 11,902,307
Realized investment
gains and (losses), net (114,436) (37,858) (143,015) (320,805)
Other income 142,314 287,442 602,893 1,037,242
10,354,133 11,636,614 34,191,657 36,962,629
Benefits and other expenses:
Benefits, claims and
settlement expenses:
Life 5,615,588 8,319,522 18,242,132 19,541,163
Reinsurance benefits
and claims (481,468) (1,294,964) (1,447,716) (2,071,008)
Annuity 411,395 398,034 1,178,807 1,286,981
Dividends to
policyholders 922,224 956,118 3,074,230 3,234,137
Commissions and
amortization of deferred
policy acquisition costs 1,083,006 703,196 2,747,329 2,789,220
Amortization of cost of
insurance acquired 612,007 996,672 1,724,294 3,680,224
Operating expenses 2,378,618 3,422,654 7,745,203 9,721,735
Interest expense 492,258 481,834 1,316,892 1,335,442
11,033,628 13,983,066 34,581,171 39,517,894
Loss before income taxes,
minority interest and
equity in earnings (loss)
of investees (679,495) (2,346,452) (389,514) (2,555,265)
Credit (provision) for
income taxes (157,919) 317,751 (285,126) 990,411
Minority interest in
loss of consolidated
subsidiaries 353,893 1,310,454 297,943 1,074,797
Equity in earnings (loss)
of investees (40,920) (174,514) 1,094 (88,929)
Net loss $ (524,441)$ (892,761) $ (375,603)$ (578,986)
Net loss per
common share $ (0.30)$ (0.48) $ (0.21)$ (0.31)
Weighted average common
shares outstanding 1,719,806 1,870,093 1,819,398 1,869,315
4
UNITED TRUST, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
September 30, September 30,
1997 1996
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities:
Net loss $ (375,603) $ (578,986)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities net
of changes in assets and liabilities resulting
from the sales and purchases of subsidiaries:
Amortization/accretion of fixed maturities 505,440 703,110
Realized investment (gains) losses, net 143,015 320,805
Policy acquisition costs deferred (557,000) (1,477,000)
Amortization of deferred policy acquisition costs 984,977 1,940,471
Amortization of cost of insurance acquired 1,724,294 3,680,224
Amortization of costs in excess of net
assets purchased 116,250 124,405
Depreciation 333,653 392,018
Minority interest (297,943) (1,074,797)
Equity in loss (earnings) of investees (1,094) 88,929
Change in accrued investment income (632,561) (673,945)
Change in reinsurance receivables 986,960 46,135
Change in policy liabilities and accruals (153,240) 2,454,616
Charges for mortality and administration of
universal life and annuity products (7,996,086) (7,681,478)
Interest credited to account balances 5,432,922 5,423,499
Change in income taxes payable 210,864 (1,013,116)
Change in indebtedness (to) from affiliates, net (31,820) (99,141)
Change in other assets and liabilities, net (1,688,706) (331,586)
Net cash provided by (used in) operating activities(1,295,678) 2,244,163
Cash flows from investing activities:
Proceeds from investments sold and matured:
Fixed maturities held for sale 0 704,583
Fixed maturities sold 0 0
Fixed maturities matured 8,186,791 19,168,548
Equity securities 105,261 8,990
Mortgage loans 1,146,863 1,858,246
Real estate 510,806 2,886,187
Policy loans 3,799,553 2,985,381
Short term 410,000 400,000
Total proceeds from investments sold and matured 14,159,274 28,011,935
Cost of investments acquired:
Fixed maturities held for sale 0 0
Fixed maturities (14,301,690)(26,559,403)
Equity securities (710,387) 0
Mortgage loans (134,314) (488,188)
Real estate (937,268) (837,866)
Policy loans (3,573,018) (3,334,865)
Short term (404,475) (300,000)
Total cost of investments acquired (20,061,152)(31,520,322)
Net cash used in investing activities (5,901,878) (3,508,387)
Cash flows from financing activities:
Policyholder contract deposits 14,069,987 17,339,900
Policyholder contract withdrawals (11,280,925)(12,033,894)
Payment for fractional shares from
reverse stock split (2,381) 0
Payment for fractional shares from
reverse stock split of subs (535,851) 0
Purchase of treasury stock (926,599) 0
Purchase of additional shares of equity investee (165,374) 0
Proceeds from issuance of notes payable 2,560,000 400,000
Payments of principal on notes payable (758,251) (1,773,475)
Net cash provided by financing activities 2,960,606 3,932,531
Net increase (decrease) in cash and cash equivalents (4,236,950) 2,668,307
Cash and cash equivalents at beginning of period 17,326,235 12,528,025
Cash and cash equivalents at end of period $ 13,089,285 $15,196,332
5
UNITED TRUST, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared by
United Trust Inc. ("UTI") and its consolidated subsidiaries
("Company") pursuant to the rules and regulations of the Securities and
Exchange Commission. Although the Company believes the
disclosures are adequate to make the information presented not be
misleading, it is suggested that these consolidated financial
statements be read in conjunction with the consolidated financial
statements and the notes thereto presented in the Company's Annual
Report on Form 10-K filed with the Securities and Exchange Commission for
the year ended December 31, 1996.
The information furnished reflects, in the opinion of the Company, all
adjustments (which include only normal and recurring accruals)
necessary for a fair presentation of the results of operations for the
periods presented. Operating results for interim periods are not
necessarily indicative of operating results to be expected for the year
or of the Company's future financial condition.
At September 30, 1997, the parent, significant subsidiaries and
affiliates of United Trust Inc. were as depicted on the following
organizational chart.
ORGANIZATIONAL CHART
AS OF SEPTEMBER 30, 1997
United Trust, Inc. ("UTI") is the ultimate controlling company. UTI owns
53% of United Trust Group ("UTG") and 33.3% of United Income, Inc. ("UII").
UII owns 47% of UTG. UTG owns 79.4% of First Commonwealth Corporation ("FCC")
and FCC owns 100% of Universal Guaranty Life Insurance Company ("UG"). UG
owns 100% of United Security Assurance Company ("USA"). USA owns 83.9% of
Appalachian Life Insurance Company ("APPL") and APPL owns 100% of Abraham
Lincoln Insurance Company ("ABE").
6
2. FIXED MATURITIES
As of September 30, 1997, fixed maturities and fixed maturities held for
sale represented 82% of total invested assets. As prescribed by the
various state insurance department statutes and regulations, the insurance
companies' investment portfolio is required to be invested primarily in
investment grade securities to provide ample protection for
policyholders. The Company does not invest in so-called "junk bonds" or
derivative investments. The liabilities of the insurance companies are
predominantly long term in nature and therefore, the companies invest
primarily in long term fixed maturity investments. The Company has
analyzed its fixed maturity portfolio and reclassified those securities
expected to be sold prior to maturity as investments held for sale. The
investments held for sale are carried at market. Management has the intent
and ability to hold its fixed maturity portfolio to maturity and as
such carries these securities at amortized cost. As of September 30, 1997,
the carrying value of fixed maturity securities in default as to principal
or interest was immaterial in the context of consolidated assets or
shareholders' equity.
3. MORTGAGE LOANS AND REAL ESTATE
The Company holds approximately $10,010,000 in mortgage loans and
$14,493,000 in real estate holdings, including real estate acquired in
satisfaction of debt, which represent 4% and 6% of total invested
assets of the Company, respectively. All mortgage loans held by the
Company are first position loans. The Company has $343,000 in
mortgage loans net of a $10,000 reserve allowance, which are in
default or in the process of foreclosure representing approximately 3% of
the total portfolio.
Letters are sent to each mortgagee when the loan becomes 30 or more
day's delinquent. Loans 90 days or more delinquent are placed on a non-
performing status and classified as delinquent loans. Reserves for loan
losses on delinquent loans are established based on management's
analysis of the loan balances and what is believed to be the realizable
value of the property should foreclosure take place. Loans are placed on
a non-accrual status based on a quarterly case by case analysis of the
likelihood of repayment.
The following tables show the distribution of mortgage loans and real
estate by type.
Mortgage loans Amount % of Total
FHA/VA $ 295,499 3%
Commercial $ 1,594,734 16%
Residential $ 8,120,010 81%
Real Estate Amount % of Total
Home Office $ 2,944,138 20%
Commercial $ 2,279,630 16%
Residential development $ 5,042,643 37%
Foreclosed real estate $ 3,856,945 27%
7
4. NOTES PAYABLE
At September 30, 1997, the Company has $22,567,000 in notes payable.
Notes payable is comprised of the following components:
Senior debt $ 7,900,000
Subordinated 10 yr. Notes 5,731,000
Subordinated 20 yr. Notes 4,035,000
Convertible notes 2,560,000
Other notes payable 2,341,000
$ 22,567,000
The senior debt is through First of America Bank - Illinois NA and is
subject to a credit agreement. The debt bears interest at a rate
equal to the "base rate" plus nine-sixteenths of one percent. The Base
rate is defined as the floating daily, variable rate of interest determined
and announced by First of America Bank from time to time as its "base
lending rate." The base rate at September 30, 1997 was 8.5%.
Principal payments of $1,000,000 are due in May of each year beginning in
1997, with a final payment due May 8, 2005. On November 8, 1997, the
Company prepaid the May 1998 principal payment.
The credit agreement contains certain covenants with which the Company must
comply. These covenants contain provisions common to a loan of this type
and include such items as; a minimum consolidated net worth of FCC to be no
less than 400% of the outstanding balance of the debt; Statutory capital
and surplus of Universal Guaranty Life Insurance Company be maintained at
no less than $6,500,000; an earnings covenant requiring the sum of the pre-
tax earnings of Universal Guaranty Life Insurance Company and its
subsidiaries (based on Statutory Accounting Practices) and the after-tax
earnings plus non-cash charges of FCC (based on parent only GAAP
practices) shall not be less than two hundred percent (200%) of the
Company's interest expense on all of its debt service. The Company is in
compliance with all of the covenants of the agreement and does not
foresee any problem in maintaining compliance in the future.
United Income, Inc. holds a promissory note receivable of $700,000 due from
FCC. This note bears interest at the rate of 1% above the variable
per annum rate of interest most recently published by the Wall Street
Journal as the prime rate. Interest is payable quarterly with principal
due at maturity on May 8, 2006.
In February 1996, FCC borrowed $150,000 from an affiliate to provide
additional cash for liquidity. The note bears interest at the rate of 1%
over prime as published in the Wall Street Journal, with interest payments
due quarterly and principal due upon maturity of the note on June 1, 1999.
The subordinated debt was incurred June 16, 1992 as a part of an
acquisition. The 10-year notes bear interest at the rate of 7 1/2% per
annum, payable semi-annually beginning December 16, 1992. These notes
except for one $840,000 note, provide for principal payments equal to
1/20th of the principal balance due with each interest installment
beginning December 16, 1997, with a final payment due June 16, 2002. The
$840,000 note provides for a lump sum principal payment due June 16, 2002.
In June 1997, the Company refinanced $204,267 of its subordinated 10-year
notes to subordinated 20-year notes bearing interest at the rate of 8.75%.
The repayment terms of these notes are the same as the original
subordinated 20 year notes. The 20-year notes bear interest at the rate
of 8 1/2% per annum on $3,530,000 and 8.75% per annum on $505,000,
payable semi-annually with a lump sum principal payment due June 16,
2012.
On July 31, 1997, United Trust Inc. issued convertible notes for cash in
the amount of $2,560,000 to seven individuals, all officers or
employees of United Trust Inc. The notes bear interest at a rate of 1%
over prime, with interest payments due quarterly and principal due upon
maturity of July 31, 2004. The conversion price of the notes are graded
from $12.50 per share for the first three years, increasing to $15.00 per
share for the next two years and increasing to $20.00 per share for the
last two years.
As partial proceeds in the acquisition of common stock from certain
officers and directors in the third quarter of 1997, the Company
issued unsecured promissory notes. These notes bear interest at 1% over
prime with interest payments due quarterly. Principal comes due at
varying times with $150,000 maturing on January 31, 1999,
$1,655,000 maturing on July 31, 2005 and one note of $70,000 requiring
annual principal reductions of $10,000 until
8
maturity on September 23, 2004. The interest rates were deemed
favorable to UTI and as aresult, the Company has discounted
the notes to reflect a 15% effective rate of interest for financial
statement purposes. The notes have a total face maturity value of
$1,875,000 and a discounted value at September 30, 1997 of $1,491,000.
Scheduled principal reductions on the Company's debt for the next five
years are as follows:
Year Amount
1997 $ 0
1998 1,527,000
1999 1,827,000
2000 1,527,000
2001 1,527,000
5. COMMITMENTS AND CONTINGENCIES
The insurance industry has experienced a number of civil jury verdicts
which have been returned against life and health insurers in the
jurisdictions in which the Company does business involving the
insurers' sales practices, alleged agent misconduct, failure to
properly supervise agents, and other matters. Some of the lawsuits have
resulted in the award of substantial judgments against the insurer,
including material amounts of punitive damages. In some states, juries
have substantial discretion in awarding punitive damages in these
circumstances.
Under insurance guaranty fund laws in most states, insurance companies
doing business in a participating state can be assessed up to
prescribed limits for policyholder losses incurred by insolvent or
failed insurance companies. Although the Company cannot predict the
amount of any future assessments, most insurance guaranty fund laws
currently provide that an assessment may be excused or deferred if it
would threaten an insurer's financial strength. Those mandatory
assessments may be partially recovered through reduction in future
premium taxes in some states. The Company does not believe such
assessments will be materially different from amounts already provided for
in the financial statements.
The Company and its subsidiaries are named as defendants in a number of
legal actions arising primarily from claims made under insurance policies.
Those actions have been considered in establishing the Company's
liabilities. Management and its legal counsel are of the opinion that the
settlement of those actions will not have a material adverse effect on
the Company's financial position or results of operations.
6. TERMINATION OF AGREEMENT REGARDING PENDING CHANGE IN CONTROL OF
UNITED TRUST, INC.
On April 14, 1997, United Trust, Inc. and United Income, Inc. formally
terminated their stock purchase agreement contract with LaSalle Group, Inc.
("LaSalle"), whereby LaSalle was to acquire certain authorized but
unissued shares of UTI and UII and additional outstanding shares in
privately negotiated transactions so that LaSalle would own not less
than 51% of the outstanding common stock of UTI and indirectly control
51% of UII.
LaSalle had not performed its obligations under the terms of the
contract, and the Company felt it should be free to negotiate with
other interested parties in becoming an equity partner.
7. REVERSE STOCK SPLIT
On May 13, 1997, the Company effected a 1 for 10 reverse stock split.
Fractional shares received a cash payment on the basis of $1.00 for each
old share. The reverse split was completed to enable the Company to meet
new NASDAQ requirements regarding market value of stock to remain listed
on the NASDAQ market and to increase the market value per share to a
level where more brokers will look at the Company and its stock. Prior
period numbers have been restated to give effect of the reverse split.
9
8. REVERSE STOCK SPLIT OF FCC
On May 13, 1997, FCC effected a 1 for 400 reverse stock split.
Fractional shares received a cash payment on the basis of $.25 for each
old share. The Company maintained a significant number of
shareholder accounts with less than $100 of market value of stock. The
reverse stock split enabled these smaller shareholders to receive cash for
their shares without incurring broker costs and will save the Company
administrative costs associated with maintaining these accounts.
9. RELATED PARTY TRANSACTIONS
On July 31, 1997, United Trust Inc. issued convertible notes for cash
received totaling $2,560,000 to seven individuals, all officers or
employees of United Trust Inc. The notes bear interest at a rate of 1%
over prime, with interest payments due quarterly and principal due upon
maturity of July 31, 2004. The conversion price of the notes are graded
from $12.50 per share for the first three years, increasing to $15.00 per
share for the next two years and increasing to $20.00 per share for the
last two years. Conditional upon the seven individuals placing the funds
with the Company were the acquisition by UTI of a portion of the holdings
of UTI owned by Larry E. Ryherd and his family and the acquisition of
common stock of UTI and UII held by Thomas F. Morrow and his family and
the simultaneous retirement of Mr. Morrow. Neither Mr. Morrow nor
Mr. Ryherd were a party to the convertible notes.
Approximately $1,048,000 of the cash was used to acquire stock
holdings of United Trust Inc. and United Income, Inc. of a retiring
executive officer of the Company and to acquire a portion of the
United Trust Inc. holdings of Larry E. Ryherd and his family. The
remaining cash received will be used by the Company to provide
additional operating liquidity and for future acquisitions of life
insurance companies.
On July 31, 1997, the Company acquired a total of 126,921 shares of
United Trust Inc. common stock and 47,250 shares of United Income, Inc.
common stock from Thomas F. Morrow and his family. Mr. Morrow
simultaneously retired as an executive officer of the Company. Mr.
Morrow will remain as a member of the Board of Directors. In exchange for
his stock, Mr. Morrow and his family received approximately $348,000
in cash, promissory notes valued at $140,000 due in eighteen months, and
promissory notes valued at $1,030,000 due January 31, 2005. These
notes bear interest at a rate of 1% over prime, with interest due
quarterly and principal due upon maturity. The notes do not contain any
conversion privileges.
Additionally, on July 31, 1997, the Company acquired a total of 97,499
shares of United Trust Inc. common stock from Larry E. Ryherd and his
family. Mr. Ryherd and his family received approximately $700,000 in cash
and a promissory note valued at $251,000 due January 31, 2005. The
acquisition of approximately 16% of Mr. Ryherd's stock holdings in United
Trust Inc. was completed as a prerequisite to the convertible notes
placed by other management personnel to reduce the total holdings of
Mr. Ryherd and his family in the Company to make the stock more
attractive to the investment community. Following the transaction,
Mr. Ryherd and his family own approximately 31% of the outstanding
common stock of United Trust Inc.
On September 23, 1997, the Company acquired 10,056 shares of UTI
common stock from Paul Lovell, a director, for $35,000 and a promissory
note valued at $61,000 due September 23, 2004. The note bears interest
at a rate of 1% over prime, with interest due quarterly and principal
reductions of $10,000 annually until maturity. Simultaneous with the stock
purchase, Mr. Lovell resigned his position on the UTI board.
10. OTHER CASH FLOW DISCLOSURE
As partial proceeds for the acquisition of common stock of UTI and UII,
the Company issued promissory notes of $140,000 due in eighteen months,
$61,000 due in seven years and $1,281,000 due in seven and onehalf years.
See note 9.
10
ITEM 2.
MANGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The purpose of this section is to discuss and analyze the Company's
financial condition, changes in financial condition and results of
operations, which reflect the performance of the Company. The
information in the consolidated financial statements and related notes
should be read in conjunction with this section.
LIQUIDITY AND CAPITAL RESOURCES
The Company and its consolidated subsidiaries have three principal
needs for cash - the insurance companies' contractual obligations to
policyholders, the payment of operating expenses and servicing of its long-
term debt. Cash and cash equivalents as a percentage of total assets
were 3.7% and 4.9% as of September 30, 1997, and December 31, 1996,
respectively. Fixed maturities as a percentage of total invested
assets were 81% and 80% as of September 30, 1997 and December 31, 1996,
respectively.
Future policy benefits are primarily long-term in nature and
therefore, the Company's investments are predominantly in long term
fixed maturity investments such as bonds and mortgage loans which
provide a sufficient return to cover these obligations. Most of the
insurance company assets, other than policy loans, are invested in
fixed maturities and other investments, substantially all of which are
readily marketable. Although there is no present need or intent to
dispose of such investments, the life companies could liquidate
portions of their investments if such a need arose. The Company has the
ability and intent to hold these investments to maturity;
consequently, the Company's investment in long term fixed maturities is
reported in the financial statements at their amortized cost.
Many of the Company's products contain surrender charges and other
features which reward persistency and penalize the early withdrawal of
funds. With respect to such products, surrender charges are generally
sufficient to cover the Company's unamortized deferred policy
acquisition costs with respect to the policy being surrendered.
Consolidated operating activities of the Company produced cash flows of
($1,296,000) and $2,244,000 for the first nine months of 1997 and 1996,
respectively. The net cash (used in) or provided by operating activities
plus net policyholder contract deposits after the payment of policyholder
withdrawals, equaled $1,493,000 for the first nine months of 1997 and
$7,550,000 for the first nine months of 1996. Management uses this
measurement of cash flows as an indicator of the performance of the
Company's insurance operations, since reporting regulations require
cash inflows and outflows from universal life insurance products to be
shown as financing activities. Dollar volume of new business production
is down 40% when comparing the first nine months of 1997 to the first
nine months of 1996. New business production suffered in 1997 from a
combination of the uncertainty generated by the pending change of
control of the Company (See Note 6), and modifications to certain
products in the Company's life insurance portfolio. The modifications
to the products were necessary to meet new regulations adopted by state
insurance departments. The modifications to the products required re-
training of the Company's agency force.
Net cash used in investing activities was $5,902,000 and $3,508,000 for
the first nine months of 1997 and 1996, respectively. The most
significant aspect of net cash used in investing activities, are the
fixed maturity transactions. Fixed maturities account for 71% and 84% of
the total cost of investments acquired for the first nine months of 1997
and 1996, respectively. The Company has not directed its investable
funds to so-called "junk bonds" or derivative investments.
Net cash provided by financing activities was $2,961,000 and
$3,933,000 for the first nine months of 1997 and 1996, respectively.
Policyholder contract deposits decreased 19% for the first nine months of
1997 compared to the first nine months of 1996. The decrease is due to
the decline in new business production. Policyholder contract withdrawals
decreased 6% for the first nine months of 1997 compared to the first nine
months of 1996.
On May 8, 1996, FCC refinanced its senior debt of $8,900,000. The
refinancing was completed through First of America Bank - Illinois NA and
is subject to a credit agreement. The refinanced debt bears interest
at a rate equal to the "base rate" plus nine-sixteenths of one percent.
The Base rate is defined as the floating daily, variable rate of interest
determined and announced by First of America Bank from time to time as
its "base lending rate." The base rate at September 30, 1997 was 8.5%.
Interest is paid quarterly and principal payments of $1,000,000 are due in
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May of each year beginning in 1997, with a final payment due May 8,
2005. The Company satisfied its $1,000,000 principal obligation for
1997 by prepaying $500,000 on November 8, 1996 and a payment of $500,000
on May 8, 1997. The next scheduled principal payment is $1,000,000 due
on May 8, 1998. On November 8, 1997, the Company prepaid the May 1998
principal payment.
On July 31, 1997, United Trust Inc. issued convertible notes for cash in
the amount of $2,560,000 to seven interest payments due quarterly and
principal due upon maturity of July 31, 2004. The conversion price of
the notes are graded from $12.50 per share for the first three years,
increasing to $15.00 per share for the next two years and increasing to
$20.00 per share for the last two years.
On a parent only basis, UTI's cash flow is dependent on revenues from a
management agreement with UII and its earnings received on invested assets
and cash balances. At September 30, 1997, substantially all of the
consolidated shareholders equity represents net assets of its
subsidiaries. Cash requirements of UTI primarily relate to the
payment of expenses related to maintaining the Company as a
corporation in good standing with the various regulatory bodies, which
govern corporations in the jurisdictions where the Company does
business. The payment of cash dividends to shareholders is not
legally restricted. However, the state insurance department regulates
insurance company dividend payments where the company is domiciled. UG's
dividend limitations are described below.
Ohio domiciled insurance companies require five days prior
notification to the insurance commissioner for the payment of an
ordinary dividend. Ordinary dividends are defined as the greater of: a)
prior year statutory earnings or b) 10% of statutory capital and surplus.
For the year ended December 31, 1996, UG had a statutory gain from
operations of $8,006,000. At December 31, 1996, UG's statutory
capital and surplus amounted to $10,227,000. Extraordinary dividends
(amounts in excess of ordinary dividend limitations) require prior approval
of the insurance commissioner and are not restricted to a specific
calculation.
Management believes the overall sources of liquidity available will be
sufficient to satisfy its financial obligations.
RESULTS OF OPERATIONS
YEAR-TO-DATE 1997 COMPARED TO 1996:
(a) REVENUES
Premium income, net of reinsurance premium, decreased 9% when
comparing the first nine months of 1997 to the first nine months of 1996.
The Company's primary product is the "Century 2000" universal life
insurance product. Universal life and interest sensitive life insurance
products contribute only the risk charge to premium income, however
traditional insurance products contribute all monies received to premium
income. Since the Company does not actively market traditional life
insurance products, it is expected that premium income will continue
to decrease in future periods as a result of expected lapses of business
in force.
Other considerations, net of reinsurance, increased approximately 1%
compared to one year ago. Other considerations consist of
administrative charges on universal life and interest sensitive life
insurance products. The insurance in force relating to these types of
products continues to increase as marketing efforts focus on universal life
insurance products.
Net investment income decreased 5% when comparing the first nine
months of 1997 to 1996. The decrease is the result of a smaller
invested asset base from one year ago. During the fourth quarter
1996, the Company transferred approximately $22,000,000 in assets as part
of a coinsurance agreement with First International Life Insurance
Company ("FILIC"). The Company has invested excess cash and financing
activities generated through sales of universal life insurance
products.
The Company's investments are generally managed to match related
insurance and policyholder liabilities. The comparison of investment
return with insurance or investment product crediting rates
establishes an interest spread. The minimum interest spread between
earned and credited rates is 1% on the "Century 2000" universal life
insurance product, the Company's primary product. The Company
monitors investment yields, and when necessary adjusts credited
interest rates on its insurance products to preserve targeted spreads. It
is expected that the monitoring of the interest spreads by
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management will provide the necessary margin to adequately provide for
associated costs on insurance policies the Company has in force and will
write in the future.
(b) EXPENSES
Life benefits, net of reinsurance benefits and claims, decreased 4% in the
first nine months of 1997 compared to 1996. The decrease in life benefits
is attributed to a decrease in mortality. There is no single event that
caused mortality to decrease. Policy claims vary from year to year and
therefore, fluctuations in mortality are to be expected and are not
considered unusual by management. The Company experienced a decline of
40% in dollar volume of new business production. This decline results in
less of an increase in reserves from new business as compared to the
previous year.
Amortization of cost of insurance acquired decreased $1,956,000 for the
first nine months of 1997 compared to 1996. The decrease is
attributed partially to the coinsurance agreement with First
International Life Insurance Company ("FILIC") as of September 30,
1996. Under the terms of the agreement, UG ceded to FILIC
substantially all of its paid-up life insurance policies. Paid-up life
insurance generally refers to a non-premium paying life insurance policy.
Cost of insurance acquired is amortized in relation to expected
future profits, including direct charge-offs for any excess of the
unamortized asset over the projected future profits. The Company did
not have any charge-offs during the periods covered by this report.
Operating expenses decreased 20% when comparing the first nine months of
1997 to the first nine months of 1996. The decrease in operating expenses
is attributed to the settlement of certain litigation in the fourth
quarter of 1996. The Company incurred elevated legal fees in the
previous year due to the litigation. Operating expenses were further
reduced from a restructuring of the home office personnel completed in
late 1996.
(c) NET LOSS
The Company had a net loss of $376,000 for the first nine months of 1997
compared to $579,000 for the first nine months of 1996. The
improvement for the current period is primarily due to the decrease in
operating expenses.
THIRD QUARTER 1997 COMPARED TO THIRD QUARTER 1996:
(a) REVENUES
Premium income, net of reinsurance premium, decreased 11% when
comparing third quarter of 1997 to 1996. The Company's primary product is
the "Century 2000" universal life insurance product. Universal life and
interest sensitive life insurance products contribute only the risk
charge to premium income, however traditional insurance products
contribute all monies received to premium income. Since the Company does
not actively market traditional life insurance products, it is expected
that premium income will continue to decrease in future periods as a result
of expected lapses of business in force.
Other considerations, net of reinsurance, decreased slightly compared to
one year ago. Other considerations consist of administrative charges
on universal life and interest sensitive life insurance products.
The insurance in force relating to these types of products continues to
increase as marketing efforts focus on universal life insurance products.
Net investment income decreased 9% when comparing third quarter of 1997
to 1996. The decrease is the result of a smaller invested asset base from
one year ago. During the fourth quarter 1996, the Company transferred
approximately $22,000,000 in assets as part of a coinsurance
agreement with First International Life Insurance Company ("FILIC").
The Company's investments are generally managed to match related
insurance and policyholder liabilities. The comparison of investment
return with insurance or investment product crediting rates
establishes an interest spread. The minimum interest spread between
earned and credited rates is 1% on the "Century 2000" universal life
insurance product, the Company's primary product. The Company
monitors investment yields, and when necessary adjusts credited
13
interest rates on its insurance products to preserve targeted spreads. It
is expected that the monitoring of the interest spreads by
management will provide the necessary margin to adequately provide for
associated costs on insurance policies the Company has in force and will
write in the future.
(b) EXPENSES
Life benefits, net of reinsurance benefits and claims, decreased 27% in
third quarter of 1997 compared to 1996. The decrease in life benefits
is due to the decrease in new business production. Mortality decreased
$363,000 in third quarter of 1997 compared to 1996. There is no single
event that caused mortality to decrease. Policy claims vary from year to
year and therefore, fluctuations in mortality are to be expected and are
not considered unusual by management.
Amortization of cost of insurance acquired decreased 39% for third
quarter of 1997 compared to 1996. The decrease is attributed
partially to the coinsurance agreement with First International Life
Insurance Company ("FILIC") as of September 30, 1996. Under the terms of
the agreement, UG ceded to FILIC substantially all of its paid-up life
insurance policies. Paid-up life insurance generally refers to a non-
premium paying life insurance policy. Cost of insurance acquired is
amortized in relation to expected future profits, including direct charge-
offs for any excess of the unamortized asset over the projected future
profits. The Company did not have any charge-offs during the periods
covered by this report.
Operating expenses decreased 31% when comparing third quarter of 1997 to
1996. The decrease in operating expenses is attributed to the
settlement of certain litigation in the fourth quarter of 1996. The
Company incurred elevated legal fees in the previous year due to the
litigation. Operating expenses were further reduced from a restructuring
of the home office personnel completed in late 1996.
(c) NET LOSS
The Company had a net loss of $524,000 for third quarter of 1997
compared to $893,000 for third quarter of 1996. The improvement is due
to the decrease in operating expenses.
FINANCIAL CONDITION
Shareholder's equity decreased 13% as of September 30, 1997 compared to
December 31, 1996. The decrease is due to the Company buying treasury
shares. Other changes to occur to the balance sheet is a decrease in
cash and cash equivalents and the corresponding increase in fixed
maturities. Future policy benefits increased as expected due to the aging
in force business.
The Company's insurance subsidiaries are regulated by insurance
statutes and regulations as to the type of investments that they are
permitted to make and the amount of funds that may be used for any one type
of investment. In light of these statutes and regulations and the
Company's business and investment strategy, the Company generally seeks to
invest in United States government and government agency securities and
corporate securities rated investment grade by established
nationally recognized rating organizations.
The liabilities are predominantly long term in nature and therefore, the
Company invests in long term fixed maturity investments, which are reported
in the financial statements at their amortized cost. The Company has
the ability and intent to hold these investments to maturity;
consequently, the Company does not expect to realize any significant
loss from these investments. The Company does not own any derivative
investments or "junk bonds". As of September 30, 1997, the carrying value
of fixed maturity securities in default as to principal or interest was
immaterial in the context of consolidated assets or shareholders'
equity. The Company has identified securities it may sell and
classified them as "investments held for sale". Investments held for
sale are carried at market, with changes in market value charged
directly to shareholders' equity.
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FUTURE OUTLOOK
The Company operates in a highly competitive industry. In connection with
the development and sale of its products, the Company encounters
significant competition from other insurance companies, many of which have
financial resources or ratings greater than those of the Company.
The insurance industry is a mature industry. In recent years, the
industry has experienced virtually no growth in life insurance sales,
though the aging population has increased the demand for retirement
savings products. Management believes that the Company's ability to
compete is dependent upon, among other things, its ability to attract and
retain agents to market its insurance products and its ability to develop
competitive and profitable products.
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PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
PROPOSED MERGER OF UNITED TRUST, INC. AND UNITED INCOME, INC.
On March 25, 1997, the Board of Directors of UTI and UII voted to
recommend to the shareholders a merger of the two companies. Under the
Plan of Merger, UTI would be the surviving entity with UTI issuing one
share of its stock (after its reverse stock split of one share for each
ten shares) for each share held by UII shareholders (after its reverse
stock split of one share for every 14.2857 shares).
UTI stock currently trades on NASDAQ. The reverse stock split
increased the price at which the Company's stock trades, enabling it to
meet new NASDAQ requirements regarding eligibility to remain listed.
UTI owns 53% of United Trust Group, Inc., an insurance holding
company, and UII owns 47% of United Trust Group, Inc. Neither UTI nor UII
have any other significant holdings or business dealings. The Board of
Directors of each company thus concluded a merger of the two companies
would be in the best interests of the shareholders. The merger will
result in certain cost savings, primarily related to costs associated with
maintaining a corporation in good standing in the states in which it
transacts business.
ITEM 6. EXHIBITS
Exhibit
Number
10 (a) Employment agreement dated as of July 31, 1997, between
Larry E. Ryherd and First Commonwealth Corporation.
10 (b) Employment agreement dated as of July 31, 1997, between
James E. Melville and First Commonwealth Corporation.
10 (c) Employment agreement dated as of July 31, 1997, between George E.
Francis and First Commonwealth Corporation. Agreements containing
the same terms and conditions excepting title and current salary were
also entered into by Joseph H. Metzger, Brad M. Wilson, Theodore C.
Miller, Michael K. Borden, and Patricia G. Fowler.
The Company hereby incorporates by reference the exhibits as reflected in
the Index to Exhibits of the Company's Form 10-K for the year ended
December 31, 1996.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED TRUST, INC.
(Registrant)
Date: November 12, 1997 By /s/ James E. Melville
James E. Melville
President, Chief Operating
Officer and Director
Date: November 12, 1997 By /s/ Theodore C. Miller
Theodore C. Miller
Senior Vice President
and Chief Financial Officer
17